Slam Dunk for Donut Franchisor in Preliminary Injunction Ruling: The US District Court for the District of Columbia Enjoins Dunkin’ Donuts Franchisee from Operating Pending Underlying Breach of Contract Action

By Katie Chaverri

By: Alan J. Schaeffer

The U.S. District Court for the District of Columbia recently granted Dunkin’ Donuts Franchising, LLC a preliminary injunction, enjoining a franchisee from using Dunkin’ Donuts’ trademarks, or operating a competing business within 5 miles during the pendency of Dunkin’ Donuts’ action against the franchisee for breach of contract and trademark infringement. Dunkin’ Donuts Franchising, LLC v. 14th Street Eatery, Inc., et al., 2015 WL 209041 (D. DC May 5, 2015). This case is another example in a long history of franchise disputes where a franchisor succeeds in enjoining its franchisee from continuing to operate after being terminated, either by enforcing trademark rights, non-compete covenants, or both. Franchisees ultimately must abide the franchise agreements they sign and their operating rights are only valid as long as they are in good standing under those agreements.

But the real lesson of this case is that a franchisee should never ignore the franchisor when a a formal dispute process is initiated. Ignorance is not bliss and will lead to a bad outcome that will be difficult to reverse and which, in many cases, might sound the death knell for the franchisee’s future business prospects. In this case, the franchisee would have been well served to respond to the Franchisor’s notice of breach. With some discussion of the non-payment problem, the parties might have found a workable solution, whether it involved a payment plan or some remedial conduct on the part of Dunkin’ Donuts in response to some complaint by the franchisee. Instead, the franchisee let Dunkin’ Donuts terminate the franchise agreement without objection, essentially admitting its wrongdoing under the franchise agreement. The case probably was already lost by the time it reached the court and the franchisee’s continued failure to respond assured the outcome for Dunkin’ Donuts.

The underlying contract dispute arose when the franchisee failed to pay Dunkin’ Donuts the royalties and advertising fees that were required under the Dunkin’ Donuts franchise agreement. Dunkin’ Donuts issued a notice of breach to the defendants and demanded payment. After the prescribed cure period expired without a response from the defendants, Dunkin’ Donuts issued a second notice. The result was the same: no response or payment. This occurred over a four month period during which time the defendants continued to operate their franchised store. Dunkin’ Donuts finally terminated the defendants’ franchise agreement and their right to continue operating the Dunkin’ Donuts store. But the defendants nonetheless remained open and operating as a Dunkin’ Donuts store.

Injunctive Relief is an “Extraordinary and Drastic Remedy”

In addition to filing suit for trademark infringement and breach of contract, Dunkin’ Donuts moved for a preliminary injunction to prevent the defendants from continuing to operate the Dunkin’ Donuts store. Injunctive relief is a powerful enforcement tool and obtaining it can be very difficult. The Dunkin’ Donuts Franchising court explained just how difficult: “A preliminary injunction is an ‘extraordinary and drastic remedy’ that is ‘never awarded as of right’.” In order to prevail on a motion for injunctive relief, the movant “must demonstrate [1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of the preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.”

How did Dunkin’ Donuts meet this extraordinary 4-part burden? First, the franchisor had to demonstrate a likelihood of success on the merit of its claims. Because the underlying facts that led to Dunkin’ Donuts terminating the franchise agreement and the fact that the franchisee continued to operate the store as an unauthorized Dunkin’ Donuts following termination were not contested, establishing likelihood of success on the merits was not difficult.

After addressing the likelihood of success on the merits, the court then addressed the “irreparable harm” element and found that Dunkin’ Donuts would be irreparably harmed if the injunction was not granted because “trademark infringement raises the presumption of irreparable harm.” Trademark infringement may lead to dilution of the distinctiveness of a trademark, loss of control of reputation and diminishment of goodwill, all of which cause irreparable harm. In this case, the defendants would irreparably harm the franchisor by continuing to operate a store using Dunkin’ Donuts marks without authorization and depriving Dunkin’ Donuts of the ability to control the use of its trademarks and ensure the quality control necessary to protect the goodwill associated with the brand.

The court then briefly addressed the last two elements necessary for granting a preliminary injunction: balance of equities and public interest. For the public interest element, the court reiterated the fact that the defendants were confusing (and deceiving) the public by operating an unauthorized Dunkin’ Donuts store and the quality and integrity of the product the public expected could suffer without the oversight of the franchisor.

The Court Delivered a Well-Reasoned Opinion but it was the Franchisee’s Total Failure to Respond or Defend Against the Breach of Contract Claims that Led to the Inevitable Result.

In the court’s discussion of the “balance of equities” element, it becomes clear that beyond the legal analysis of the various criteria necessary to grant injunctive relief, possibly the determining factor for the court decision in granting Dunkin’ Donuts’ motion was that the franchisee defendants were no-shows. They did not contest the termination by Dunkin’ Donuts and did not at any time respond to or appear during the legal proceeding. The court explained: “Based on the uncontested facts, Defendants brought this fate upon themselves by not paying contractually obligated fees.” Had the defendants contested the original breach, or at least approached Dunkin’ Donuts in response to the notice or to try to resolve the matter, they might have had the chance to make a claim for wrongful termination or franchisor breach. And when the franchisee totally ignored the legal action, the defendants left the court no choice but to accept Dunkin’ Donuts’ termination as justified and correct. And once the termination was accepted as the proper course of conduct by Dunkin’ Donuts, it did not seem so drastic or extraordinary for the court to find the elements necessary to grant the preliminary injunction.

This decision is a stark reminder of the power of injunctive relief – in this case that relief literally put the defendant out of business at the outset of litigation. Even if the defendant in this case is able to fund the fight on an ongoing basis, they may never recover the amounts lost due to their interrupted business operations. More than that, though, this case stands for the proposition that business owners/senior management need to take disputes seriously. The plaintiff in this case had to carry a very heavy burden in order be awarded an injunction. But the plaintiff was helped in this regard by a defendant that failed to assert a defense, at both the demand stage before litigation and once in court when the plaintiff sought injunctive relief.